Is It Time to Bail on Facebook Stock?

We may have hit peak Facebook (NASDAQ: FB  ) . Janney Capital Markets analyst Tony Wible downgraded shares of the leading social networking website operator last week, arguing that the stock's lofty valuation isn't supported in a climate of decelerating growth.

Wible is lowering his rating from buy to neutral, and his price target of $82.50 doesn't seem to offer a lot of upside from here. 

It isn't easy raining on Facebook's parade. The stock opened at a new all-time high on Wednesday, and the shares have more than quadrupled since bottoming out two summers ago. Facebook's IPO may have been more than a bit bumpy, but those that stuck it out or took advantage of the once broken IPO have easily beaten the market over the past two years.

Going against the crowd isn't easy, and Wible becomes the first analyst to downgrade the stock in nearly six months.  

Turning friend requests into fiend requests
Another reason why it's hard to bet against Facebook is that it's nailed the game of managing expectations. It has blown through Wall Street profit estimates with ease in its more than two years as a public company, and more often than not it hasn't even been close. 

Let's check out the past year alone of Facebook holding up against the prognosticators.

Quarter

EPS Estimate

EPS

Surprise

Q3 2013

$0.19

$0.25

32%

Q4 2013

$0.27

$0.31

15%

Q1 2014

$0.24

$0.34

42%

Q2 2014

$0.32

$0.42

31%

Source: Thomson Reuters

These are the largely bullish analysts that can't seem to keep up with Facebook's good fortune. If Facebook's consistently trouncing bottom-line targets by double-digit percentage margins can someone really get it right by being a bear here?

It's true that Facebook is overvalued by most conventional measuring sticks. The stock is trading at 47 times this year's profit forecast. Even if we look out to 2015 it's still fetching a steep 38 times estimated earnings. You won't woo too many value investors at these multiples. 

However, it's also important to remember that Facebook has made bears look bad in the past. When Facebook went public there were already concerns that the site was losing traction with stateside and -- more importantly -- young users. Whether that actually played out or not, Facebook on the whole continues to grow.

Wible is right about monthly active user growth continuing to decelerate. There were 1.32 billion monthly active users in June, a big number but a mere 14% advance over the prior year. The thing that bears need to keep in mind is that Facebook has gotten exponentially better at monetizing its traffic. Its active user base may have only climbed 14% over the past year, but revenue soared 61% in its latest quarter with ad revenue growing even faster than that.

Let's not assume that Facebook has run out of ways to cash in on its sticky audience. Earlier this summer, users began to experience Facebook videos that start to play -- without sound -- when someone is scrolling through a news feed. The dot-com darling hasn't gotten a lot of grief for that recent update, but why do you think Facebook is getting users used to seeing the videos that their friends upload start to play on mute?

Obviously Mark Zuckerberg is getting ready to introduce the long overdue video ads that will also likely begin to stream silently when scrolling through a feed. If advertisers are paying good money for traditional ads reaching Facebook's highly targetable audience, one can only imagine what it will be able to rake in with the next wave of digital marketing initiatives. 

Wible may be right. Facebook may be angling for a correction. However, fundamentally speaking, we have yet to see the best of Facebook.

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